Federal worker classification law is in flux once more. The Department of Labor’s Wage and Hour Division issued a new Proposed Rule on February 27, 2026, that would discard the classification standard put in place by the Biden administration in 2024 and return to the framework that had been established near the end of the first Trump administration. The 2024 standard treated six different factors as equals under a broad, holistic analysis; the framework being revived instead designates two factors as the dominant considerations in deciding whether a given worker is an employee or an independent contractor.
The Proposed Rule’s reach extends beyond the Fair Labor Standards Act (FLSA). It would also govern classification under the Family and Medical Leave Act (FMLA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA), both of which incorporate the FLSA’s definitions of “employ” and “employee.”
The DOL’s Case Against the 2024 Framework
The 2024 Rule took a “totality-of-the-circumstances” approach, using six equally weighted factors to assess whether the economic reality of a working relationship indicated that a worker was dependent on an employer, and therefore likely an employee, or was genuinely self-employed as an independent contractor. The DOL now contends this approach generated more confusion than clarity.
In its Notice of Proposed Rulemaking, the agency argued that the 2024 Rule’s insistence on examining the “whole activity,” combined with insufficient guidance on applying its factors, left businesses and workers without a reliable way to predict how any given arrangement would be classified. Returning to an updated version of the 2021 Rule, the DOL says, will restore a clearer, more predictable standard grounded in longstanding judicial precedent and better aligned with today’s economy.
Economic Dependence as the Touchstone
At the heart of the Proposed Rule is a straightforward question: is the worker genuinely operating his or her own independent enterprise, or is he or she functionally reliant on a single company for a steady stream of work, much as a conventional employee would be? The inquiry does not turn on how much a worker earns or whether he or she serves multiple clients. It focuses on the specific nature of the worker’s dependence on one particular hiring entity.
Five factors guide this analysis, though they are not all created equal. Two serve as primary indicators and carry substantially more weight than the others. When both primary factors point toward the same classification, the DOL considers that result to be very likely correct.
Core Factor One: Who Controls the Work?
The first dominant factor looks at who actually directs how the work gets done. When the worker, not the company, controls things like his or her schedule, the projects he or she accepts, and the freedom to work for other clients simultaneously, the factor favors independent contractor status. When the company sets the worker’s schedule or workload, or effectively requires the worker to be exclusive to that company, the factor points toward employee status.
The Proposed Rule specifies that certain business requirements do not amount to the kind of control that signals employment. Mandating that a worker hit agreed-upon deadlines, carry adequate insurance, follow safety requirements, or meet quality standards falls outside the scope of employment-style control. This exclusion is wider than the one in the 2024 Rule, which only carved out compliance with laws and regulations.
Core Factor Two: Profit and Loss Potential
The second primary factor examines whether the worker has a real financial stake in the outcome of his or her work, that is, he or she can earn more through shrewd decisions and investment, or lose money when things go wrong. Evidence that a worker exercises managerial judgment, brings in additional help, or invests in tools and materials all support an independent contractor finding. A worker with no meaningful upside or downside tied to his or her own efforts appears more like an employee.
Only one of the two elements, initiative or investment, needs to be present; both are not required. This differs from the 2024 Rule, which treated investment as a standalone factor and measured worker investment relative to employer investment. The Proposed Rule merges investment into this single factor and drops the comparative element entirely.
Secondary Factors: Relevant When the Core Factors Conflict
If the two primary factors point in opposite directions, three additional factors are brought into the analysis:
- Specialized skills. If the work requires expertise or training that the hiring company does not provide, independent contractor status is more likely. If the company provides the necessary training itself, the arrangement looks more like employment. Unlike under the 2024 Rule, a worker’s self-driven initiative plays no role in this assessment.
- Duration of the relationship. An arrangement that was always understood to be temporary or project-based supports independent contractor status, while an indefinite, continuing relationship suggests employment. Work that recurs on a regular basis may still count as finite in duration, though short-term or seasonal work alone does not settle the question.
- Operational integration. A worker’s tasks that can be meaningfully distinguished from the company’s core production activities suggest independent contractor status. If the work is deeply embedded in the company’s day-to-day operations, it points the other way. One notable change: unlike the 2024 Rule, the Proposed Rule no longer asks whether the work is central to the employer’s primary line of business.
Additional factors beyond these five may be considered, but only where they genuinely illuminate whether the worker is running an independent operation.
Actual Practice Governs Over Paper Rights
The Proposed Rule makes clear that how a relationship actually functions carries more evidentiary weight than what a contract says on paper. A company that holds the contractual right to oversee a worker but never uses that authority cannot rely heavily on that reserved power to argue for employee status. And a worker who has nominal rights, such as negotiating pay or taking other clients, but who is practically unable to exercise them, cannot point to those rights as evidence of independence.
Unexercised contractual rights still count for something, but they are less telling than actual conduct. This is a notable departure from the 2024 Rule, which gave reserved contractual authority roughly equal, and in some cases greater, weight compared to how the parties actually behaved.
State Standards Remain in Effect
The Proposed Rule addresses only the federal classification standard. State laws are unaffected, and many impose more demanding tests. For example, New Jersey, like several other states, uses the “ABC Test” to determine a worker’s appropriate classification. That test begins with the presumption that every worker is an employee. To overcome that presumption, three conditions must be met: the worker must be free from the company’s direction and control; the work must be performed outside the company’s normal course of business or off its premises; and the worker must ordinarily be engaged in an independently established trade or profession. Employers operating across state lines need compliance frameworks that account for these differences, not just the federal standard.
The comment period on the Proposed Rule closes April 28, 2026. The final rule may be refined, but it is unlikely to diverge substantially from what has been proposed, and will almost certainly resemble the 2021 framework more than the 2024 rule it is meant to replace.
If you have questions about the new rule or regarding worker classification generally, please contact Barry Capp at Ansell.Law.